The S&P's earnings, measured on a trailing twelve month basis, are expected to bottom out this quarter (Q3) down -6.1% from the peak of Q3 2014. The pullback in earnings has spread from the energy sector to materials and staples. Health Care, Technology and Consumer Discretionary Sectors have faired the best without a single down quarter.
The graphs below show the reported and expected earnings of the S&P and selected sectors. This graphic representation makes clear the fact that the economy is partly in recession and partly quite resilient. The performance of the sectors roughly follows their earnings path. The Energy and Materials Sectors down the most while Discretionary and Health Care are up.
Will earnings growth return to the S&P in Q4? The market expects Q4 earnings to be up 14.9% on a year-over-year basis. Q4 would be the first quarter of earnings growth since Q3 2014.
My outlook is for a slow reversion of the weaker sectors back toward growth. I don't see a strong snap back occurring given the current over capacity situation in nearly every commodity. I do expect the strong sectors to remain strong, particularly consumer discretionary. The one thing that would disturb me from my bullish view is if the U.S. consumer starts to show signs of weakness. This is what I am keeping my eye as an indicator the market might have further to go on the downside.
Original Blog Post
Michael Grove, CFA